Three Additions to my Portfolio

After a very volatile fourth quarter, the stock market has performed quite nicely in 2019. Year to date, the S&P 500 is up 11.4%!

The big drop in the stock market at the end of 2018 has created some compelling opportunities, and I'm happy to add three new stocks to my DivGro portfolio. These stocks are trading at much higher yields than their historical average dividend yields. In my view, these are high-quality dividend growth stocks with excellent track records, safe dividends, and strong dividend growth rates.

This article reports on the three new positions I established in my portfolio. Two stocks are in the Consumer Staples sector, and one is an Industrials sector stock.

Addition #1: ADM (200 shares @ $45.00)

The first addition to my portfolio is a Dividend Champion with 43 consecutive years of higher dividend payments, Archer Daniels Midland (ADM). The buy is the result of an early options assignment.

In August 2018, I sold two $45 December 2018 ADM puts for $122.27, but in December I rolled forward these options to the March 2019 expiration date and earned an additional $178.85.

On 19 February, the two $45 March 2019 ADM puts got assigned and I bought 200 shares of ADM for $45 per share, for an initial yield on cost (YoC) of 3.11%.

Since ADM closed at $41.85 per share on 19 February, the buy resulted in an unrealized loss of $3.15 × 200 = $630. However, I received $301.12 selling the options, which somewhat softens the blow.

About ADM

Founded in 1898 and headquartered in Chicago, Illinois, ADM is engaged in the processing of oilseeds, corn, wheat, cocoa, and other agricultural commodities. The company manufactures protein meal, vegetable oil, corn sweeteners, flour, and other value-added food and feed ingredients, as well as biodiesel and ethanol.

As mentioned earlier, ADM is a Dividend Champion with 46 consecutive years of dividend increases. The stock currently yields 3.29% at $42.49 per share and has an annualized dividend growth rate of 12% over the last five years. According to Simply Safe Dividends, ADM's dividend is considered Very Safe with a dividend safety score of 96.

Source: Simply Safe Dividends

Valuation

Here are several fair value estimates and price targets for ADM:

Finbox.io Fair Value: $59 (uncertainty: medium) 
Morningstar Fair Value Estimate: $46 (uncertainty: high)
Simply Safe Dividends Derived Fair Value: $50 (yield is 18% above 5-year average yield)

Simply Wall St Future Cash Flow Value: $41 (2-stage discounted cash flow analysis)
TipRanks Analyst Price Target: $46 (2 Analysts • target range: $44–$47)
Value Line Target Price: $58 (target range: $50–$65)
Yahoo! Finance Analyst Price Target: $52 (10 analysts • target range: $44–$58)

Ignoring the lowest and highest ($41 and $59), and averaging the mean and median of the remaining estimates and price targets, I arrive at a reasonable fair value estimate of $50.

My buy price of $45 is 10% below this fair value estimate, while the current stock price of $42.49 is discounted by about 15%.

Compared to its historical average dividend yield, ADM's yield of 3.29% is abnormally compelling:

Source: Dividend Channel

Ratings

Following is a table containing ratings and rankings of ADM from various sources:

DARS Rating:    Highly Recommended (3.6 to 4.5)    Rating for Stocks:   ★★★☆☆ (5-Star Price < $27.60)   Analyst Consensus:    (2 Analysts)    Rating and Rank:    Financial Strength:       Safety:      Rank and Style Scores:    Hold     †VGM:

†VGM Style:  Value   Growth   Momentum  and  combined VGM  score

And here is ADM's dividend scorecard:
Source: essential^α (Seeking Alpha Essential)

This buy adds $280 to DivGro's projected annual dividend income.

Addition #2: FDX (15 shares @ $179.45)

The second stock I added to DivGro recently is FedEx (FDX), a stock that is trading at a big discount to fair value, mainly due to exaggerated concerns that FedEx is vulnerable to the risk of Amazon entering the package-delivery business.

On 19 February, I bought 15 shares of FDX for $179.45 per share for an initial YoC of 1.45%.

About FDX

Founded in 1971 and headquartered in Memphis, Tennessee, FDX provides transportation, e-commerce, and business services worldwide. The company's Express segment offers shipping services for delivery of packages and freight, while its Ground segment provides business and residential ground package delivery services. FDX also operates in the Freight; Services; and Corporate, Other and Eliminations segments.

FDX is a Dividend Contender with 17 consecutive years of dividend increases. The stock now yields 1.44% at $180.49 per share and has a spectacular annualized dividend growth rate of 32% over the last five years. According to Simply Safe Dividends, FDX's dividend is considered Safe with a dividend safety score of 70.

Source: Simply Safe Dividends

Valuation

Here are several fair value estimates and price targets for FDX

Finbox.io Fair Value: $214 (uncertainty: low) 
Morningstar Fair Value Estimate: $210 (uncertainty: medium)
Simply Safe Dividends Derived Fair Value: $325 (yield is 80% above 5-year average yield)

Simply Wall St Future Cash Flow Value: $156 (2-stage discounted cash flow analysis)
TipRanks Analyst Price Target: $218 (20 Analysts • target range: $156–$275)
Value Line Target Price: $340 (target range: $305 - $375)
Yahoo! Finance Analyst Price Target: $223 (12 analysts • target range: $148–$360)

Ignoring the lowest and highest ($156 and $340), and averaging the mean and median of the remaining estimates and price targets, I arrive at a reasonable fair value estimate of $228.

My buy price of $179.45 is about 21% below fair value.

Compared to its historical average dividend yield, FDX's yield of 1.44% is abnormally compelling:

Source: Dividend Channel

Ratings

Following is a table containing ratings and rankings of FDX from various sources:

DARS Rating:    Neutral (2.6 to 3.5)    Rating for Stocks:   ★★★★☆ (5-Star Price < $147)   Analyst Consensus:    (20 Analysts)    Rating and Rank:    Financial Strength:       Safety:      Rank and Style Scores:    Buy     †VGM:

†VGM Style:  Value   Growth   Momentum  and  combined VGM  score

And here is FDX's dividend scorecard:

Source: essential^α (Seeking Alpha Essential)

My new FDX position adds $39 to DivGro's projected annual dividend income.

Addition #3: PEP (20 shares @ $116.44)

I've looked at PepsiCo (PEP) many times before but always found an excuse or reason not to invest. Fortunately, the stock is now trading below my fair value estimate, which allowed me to open a position!

On 20 February, I bought 20  shares of PEP at $116.44 per share, giving me an initial YoC of 3.19%.

About PEP

PEP is a global beverage and food company. The company distributes beverages under well-known brands such as Pepsi, Gatorade, Mountain Dew, 7UP, and Tropicana, and food and snacks under brands such as Quaker, Lay’s, Doritos, Cheetos, and Ruffles. PEP was founded in 1898 and is headquartered in Purchase, New York.

PEP is a Dividend Champion with 46 consecutive years of dividend increases. The stock currently yields 3.18% at $116.76 per share and has an annualized dividend growth rate of 9% over the last five years. According to Simply Safe Dividends, PEP's dividend is considered Very Safe with a dividend safety score of 94.

Source: Simply Safe Dividends

Valuation

Here are several fair value estimates and price targets for PEP:

Finbox.io Fair Value: $118 (uncertainty: low) 
Morningstar Fair Value Estimate: $122 (uncertainty: low)
Simply Safe Dividends Derived Fair Value: $130 (yield is 12% above 5-year average yield)

Simply Wall St Future Cash Flow Value: $106 (2-stage discounted cash flow analysis)
TipRanks Analyst Price Target: $124 (8 Analysts • target range: $111–$133)
Value Line Target Price: $150 (target range: $135 - $165)
Yahoo! Finance Analyst Price Target: $118 (19 analysts • target range: $107–$133)

Ignoring the lowest and highest ($106 and $150), and averaging the mean and median of the remaining estimates and price targets, I arrive at a reasonable fair value estimate of $122.

My buy price of $116.44 is about 5% below fair value.

Compared to its historical average dividend yield, PEP's yield of 3.18% is quite compelling:

Source: Dividend Channel

Ratings

Following is a table containing ratings and rankings of PEP from various sources:

DARS Rating:  Recommended (3.6 to 4.5)    Rating for Stocks:   ★★★★☆ (5-Star Price < $97.60)   Analyst Consensus:  (7 Analysts)    Rating and Rank:    Financial Strength:       Safety:      Rank and Style Scores:    Sell     †VGM:

†VGM Style:  Value   Growth   Momentum  and  combined VGM  score

And here is PEP's dividend scorecard:

Source: essential^α (Seeking Alpha Essential)

My new PEP position adds $74.20 to DivGro's projected annual dividend income.

Concluding Remarks

I added three new positions to DivGro in February.

ADM is a full position, while I consider FDX and PEP to be starter positions. FDX is a low-yielding stock, but its dividend is growing at a spectacular rate. ADM and PEP both offer dividend yields above 3% and strong dividend growth rates.

All three stocks are trading at compelling yields relative to their historical 5-year average dividend yields. They also trade below my fair value estimates.

Together, these stocks will add about $393 to DivGro's projected annual dividend income.

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